A firm can use two different production technologies, with capital and labor req

Question

A firm can use two different production technologies, with capital and labor requirements at each level of output as follows:

                        Technology 1             Technology 2

Output             K         L                      K         L         

11                    6          1                      2          7                     

12                    7          3                      3          10                               

13                    9          5                      4          14                               

14                    12        7                      5          20                   

(a) Suppose the firm is operating in a low-wage country, where capital cost is $4 per unit and labor cost is $2 per worker. For each level of output, which technology is the cheapest? Show your work.

(b) Now suppose the firm is operating in a high-wage country, where capital cost is $2 per unit and labor cost is only $4 per worker. For each level of output, which technology is the cheapest? Show your work.

(c) Suppose the firm moves from a high-wage to a low-wage country but that its level of output remains constant at 13 units. How will its total employment change? Explain.

Explanation / Answer

(a)

(b)

(c) If the firm moves from a high-wage to a low-wage country but that its level of output remains constant at 13 units: employment of Capital is reduced by 5 (i.e. 9 - 4) and employment of Labor is increased by 9 (i.e. 14 - 5)

Output Cost of Tech 1 Cost of Tech2 Cheapest Tech. 11 $26 ($4*6 + $2*1) $22 ($4*2 + $2*7) Tech 2 12 $34 ($4*7 + $2*3) $32 ($4*3 + $2*10) Tech 2 13 $46 ($4*9 + $2*5) $44 ($4*4 + $2*14) Tech 2 14 $62 ($4*12 + $2*7) $60 ($4*5 + $2*20) Tech 2

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